Governance Insights Center

Technology series
Emerging technologies

February 2018

The Essential Eight technologies

Board byte: blockchain

Blockchain technology has the potential to disrupt many aspects

of how companies do business. What should boards know?

Blockchain is a nascent technology

that can simplify and secure transactions
among parties. But there are many
misconceptions about the new
technology. And it poses certain risks.
Boards should understand these risks,
as well as the potential opportunities
and the impacts on company strategy.

pwc.com/us/governanceinsightscenter
PwC Governance Insights Center
Technology series

Imagine not having to use a middle man for any transaction.

That’s one of the key advantages of blockchain technology.
There has been a lot of buzz about blockchain, but what
is it, exactly?

A blockchain is a ledger of all transactions in a network. It

is decentralized, meaning that it is not stored in any single
location. Participants in the network themselves confirm the
transactions, or “blocks.” So there is no need for a trusted
third-party intermediary. Blockchain can have powerful
applications in payments, supply chains and voting. But it
is a nascent technology. There is a long way to go to realize
such ambitions.

Blockchain is built on four main concepts:

1. It is a distributed ledger, so every participant in the network

has simultaneous access to a view of the information.

2. Cryptographic functions ensure the integrity and security

of the information.

3. Participants confirm changes directly with one another.

This replaces the need for a third party to authorize transactions.

4. It can run additional business logic (set by computer code)

that allows the agreement on and automatic enforcement
of the expected behavior of a transaction or asset embedded
in the blockchain. These are known as smart contracts.

Board byte: blockchain 2

 PwC Governance Insights Center
Technology series

Together, these concepts create a powerful opportunity to

displace reliance on central trust actors or intermediaries
(e.g., brokers, bankers, lawyers, retailers). Other benefits of
blockchain can include greater security and transparency
and more accurate tracking of transactions, along with a
permanent ledger of activity. These benefits are expected to
reduce costs for companies.
Blockchain’s benefit:
Is it tamper-proof?
A blockchain’s integrity hinges on
Many blockchains already exist, and more are being created
strong cryptography that validates every day. There is no single version of what a blockchain
and chains together blocks of looks like. They can be open to everyone (public) or for a
transactions with hashes. Each controlled group (private). The best-known public blockchain
new block contains a hash of the
is the one that underlies the cryptocurrency bitcoin.
previous block, making it nearly
impossible to tamper with any
individual transaction record
without being detected.

A hash function is an algorithm

that converts an input of letters
and numbers into an encrypted
output of a fixed length.

"Blockchain is the first native digital medium for

value, just as the internet was the first native digital
medium for information.”

– Don and Alex Tapscott, “The Impact of the Blockchain Goes Beyond Financial
Services,” Harvard Business Review, May 10, 2016.

Board byte: blockchain 3

 PwC Governance Insights Center
Technology series

A look at
blockchain technology
The blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Using this
What is it? technology, participants can confirm transactions without the need for a central certifying authority.
Potential applications include fund transfers, settling trades, voting and many other uses.

How it works:

The requested A verified transaction

transaction is Validation can involve
broadcast to a P2P cryptocurrency,
Someone requests network consisting The network of nodes contracts, records
a transaction. of computers, validates the transaction or other information.
known as nodes. and the user's status
using known algorithms.

Once verified, the

transaction is
combined with
other transactions
The new block is then added to the to create a new
The transaction existing blockchain, in a way that is block of data for
is complete. permanent and unalterable. the ledger.

Increased Complex Cryptocurrency is a medium of exchange, created

transparency technology and stored electronically in the blockchain, using
encryption techniques to control the creation of
Accurate Regulatory monetary units and to verify the transfer of funds.
tracking implications Bitcoin is the best known example.

Permanent Implementation
ledger challenges

Cost Competing
reduction platforms Has no intrinsic Has no physical Its supply is not
value in that it is not form and exists only determined by a central
redeemable for in the network. bank and the network is
another commodity, completely decentralized.
such as gold.
Sources: PwC, Next in Tech blog.
PwC, "Money is no object: Understanding the evolving cryptocurrency market, 2015.
strategy+business, "A Strategist's Guide to Blockhcain," January 2016. *For more on cryptocurrencies, see page 6.
TechDay, "How Blockchain Is Disrupting Everything," 2016.
Board byte: blockchain 4
 PwC Governance Insights Center
Technology series
A solution to sharing
your personally
identifiable information?
Networks using blockchain-style
immutability and encryption are
being designed to eliminate the
need to share personally identifiable
information online. The Sovrin
Network, for example, uses unlinked
identifiers and verified assertions
(third-party attestations that
function like physical credentials)
that can be shared in a trusted way
through a distributed ledger. The
state of Illinois is considering this
approach for birth certificates. Its
proposed framework would allow
parents and doctors present at a
child’s birth to officially log that
birth on a permissioned blockchain.
Government agencies would verify
birth registration information and
then cryptographically sign identity
attributes (e.g., blood type, legal
name), creating “verifiable claims.”
This information would be stored on
a tamper-proof distributed ledger
and accessible only with consent
from a legal guardian. Businesses
and governments would be able
to verify citizenship by requesting
access to this information. The
Finnish government and the Canadian
Province of British Columbia are
also exploring this type of “self-
sovereign” identification.
Looking past the hype to the risks
Blockchain offers opportunities, but there are risks, too. It
is still an emerging technology, and it needs to be proven
before it can be scaled for broader use. While blockchains
themselves have unique security features, there is significant
risk if the IT environment surrounding blockchain technology
has serious weaknesses. A poorly-designed system can
make it vulnerable to cybercrimes.
There is also concern about data privacy and personal identity
risks. In the case of public blockchains, users are typically
identified only by pseudonyms, and transactions are encrypted
so no personal information is shared. This protects users’
personal identities. But this anonymity can also enable criminal
behavior and create a haven for the perpetration of financial
crimes. In the case of private blockchains, the group managing
the chain’s code determines how participants are identified.
These risks should be considered against the security
and potential for fraud in the systems blockchain is
intended to replace.
Increasing investment in blockchain 73
Quarterly equity investments in blockchain-related companies*
54
47
41
31 32
$117 $83 $130 $249 $261 $392
Q3’16 Q4’16 Q1’17 Q2’17 Q3’17 Q4’17
*Excluding initial coin offerings Number of equity deals
Source: CB Insights, January 18, 2018. Total equity funding (in millions)
Board byte: blockchain 5
 PwC Governance Insights Center
Technology series
Blockchain technology
could add as much as
$300 to $400 billion of
annual economic value
globally by 2027.1
How are companies planning
to use blockchain?
Settlements/payments
Smart contracts
Supply chain/tracking
Source: Juniper Research, Blockchain
Enterprise Survey, August 2017.
Blockchain in action: the financial
services industry
Companies in the financial services industry have been
among the first to adopt blockchain technology. They have
focused on two areas: cryptocurrencies and infrastructure.
Cryptocurrency applications include payments, digital wallets
and trading. Infrastructure solutions look to blockchain
technology to replace decades-old infrastructure around
networks for trading and exchange transactions. These
changes could reduce the risk, fraud and costs inherent in
traditional transaction validation and ledger management.
Blockchains can eliminate redundancy, version control
problems and delays that are standard in today’s banking
system because every core transaction is processed just
once in a single shared electronic ledger.
How could it be used?
Stock exchanges: Blockchain could be used to facilitate the
issuance, transfer and settlement of securities.
Post-trading activity: Nearly 40 financial institutions around
the world formed the Post Trade Distributed Ledger Working
Group to investigate how blockchain technology can be used
to enhance the clearing, settlement and reporting of trades.
Board byte: blockchain 6
 PwC Governance Insights Center
Technology series

The mortgage industry: From start to finish, buying a

How do smart
contracts work?
Contract
definition
Users define the terms and
trigger events of their contract(s)
and specify parameters between
counterparties
Triggering
events
Events trigger contract execution
according to pre-defined terms.
Devices are interconnected
through the blockchain for users
to verify the information
home today means dealing with a host of intermediaries,
paperwork, fees and time. Real estate registry records, for
example, are often antiquated, paper-based and located
across various governmental agencies. Moving these
documents to a public ledger would streamline the process,
reducing the time, paperwork and costs involved in the process.
Cross-border trade: Blockchain has the potential to disrupt
trade finance, the millennia-old system relying on mostly
paper-based transactions that support the global exchange
of goods. Currently, the parties involved (importers, exporters,
shippers, bankers, etc.) all maintain their own financial
documents and databases for every transaction – which
need to be reconciled against each other. Blockchain’s smart
contracts would automate payments among all parties, and
digital documents would eliminate current manual,
paper-based systems.

Execution
of contract
Upon consensus, the contract terms
are executed and blockchain
integrations with third-party application
programming interfacess are utilized
for inter-connected services

Value transfer
& final settlement
Accounts are settled and the
information is broadcasted
throughout the network

Board byte: blockchain 7

PwC Governance Insights Center
Technology series

Blockchain: beyond financial services

Blockchain activity is expanding beyond financial services.

Companies in shipping, manufacturing, consumer goods,
automotive and healthcare, among others, are exploring uses
for the technology. They are developing applications in supply
chain management, logistics and product origin tracking (i.e.,
the authenticity, security and traceability of goods).

How could it be used?

Shipping and supply chain management –

Moving freight across the globe is a big
business. One error or discrepancy in the
data can wreak havoc, causing major delays
and increased costs. In August 2017, the Blockchain in
Transport Alliance (BiTA) was founded as a forum for the
development, standards setting and adoption of blockchain
in the trucking, transportation and logistics industries.
Blockchain potentially offers a way to improve efficiency and
transparency in global trade, as well as to lower costs. Other
companies are exploring how to use blockchain to improve food
safety and origin tracking throughout the supply chain. It can be
used to track goods from farms to grocery stores to consumers.

Proxy voting and elections – Investor relations

manager Broadridge and others are exploring
using blockchain in proxy voting. They say it can
improve the transparency of proxy voting and
supporting analytics. Some speculate that blockchain could also
be used for election voting, to improve the security of the process
and encourage greater participation. Constituents would use their
mobile devices or computers to vote. Each person could vote
only once, with each vote recorded on the immutable blockchain
ledger, ensuring no manipulation, tampering or fraud.

Board byte: blockchain 8

 PwC Governance Insights Center
Technology series
How blockchain is
transforming audits
Blockchain could also impact
the audit profession. If all
transactions for a company occur
in an autonomously-monitored
environment, auditors will be able
to reduce their effort validating the
intermediate processes. Blockchain
technology may allow auditors to
focus more attention on the output
of the system instead of subjecting
it to the sample-based testing. The
focus may shift to assuring that the
blockchain itself and the technology
around it are secure.
High hopes for blockchain in healthcare –
Many companies in the healthcare industry
are thinking about how blockchain might help
solve one of the industry’s biggest problems:
securing and standardizing data. Data today isn’t often shared
among doctors or providers. Patients themselves have to
request copies of their medical histories. Blockchain’s ledger
technology would ensure the integrity of personal health
information, medical records and prescriptions, clinical trials
and medical research. And all healthcare participants (e.g.,
doctors, surgeons, pharmacists, insurers, patients) would have
access to that secure ledger of data. In Europe, Estonia is
using blockchain to secure its citizens’ medical histories.
Even the government is getting in on
blockchain – The US Department of
Homeland Security, for example, is looking to
blockchain to process international travelers,
secure data collected by cameras and other devices at US
ports of entry and to facilitate trade across borders. Other
potential uses by the government include collecting taxes,
issuing passports, recording land transfers and generally
ensuring the integrity of records and services.
Board byte: blockchain 9
PwC Governance Insights Center
Technology series

Adoption benefits and barriers

As a collaborative technology, blockchain offers the ability

to dramatically improve the business processes that occur
between – and within – companies. The immutability of data
stored in blockchains provides a level of trust and transparency
few technologies can attempt to match. It also allows for
accurate tracking and greater transparency. Blockchains are
expected to reduce risk and fraud. Many companies anticipate
a significant cost reduction for transactions and recordkeeping.
Using one single distributed ledger can eliminate the time and
effort that go into reconciling multiple versions.

But just like with any new technology, there are also barriers
to adoption. In order for blockchain to be successful, there
needs to be broad adoption where enough parties are
either using the same underlying blockchain platform or
interoperable platforms. That means further development
and adoption of standards and specifications. Some
companies may have to overhaul their existing systems,
while others may have to integrate blockchain technology
with legacy infrastructure. Both require time and money.
Scaling blockchain to process a significantly higher volume
of transactions is another challenge. And there is uncertainty
around how the technology will be regulated.

There is also the question of how to implement controls to ensure

that the people doing the transactions are trustworthy. Without
that, the system itself and the recorded actions cannot be
trusted, and there could be unintended consequences. Because
the ledger is tamper-proof, some people may believe that they
are in a fully-protected environment. But the more autonomous a
blockchain environment becomes, the more risks it poses.

Board byte: blockchain 10

PwC Governance Insights Center
Technology series

Questions boards can ask

management about blockchain

Boards will want to understand the opportunities and risks that

come with blockchain. Here’s what boards can ask management
about how blockchain will fit into the company’s strategy:
• Have we thought about how we could use blockchain
technology and considered the pros and cons? What are
our competitors doing? What are the security and privacy
risks, as well as mitigating factors, of using blockchain?
• What would our blockchain business model look like?
Would we use a public or private blockchain? What
vendor would we use? How much would it cost? How
much cost volatility would there be moving to blockchain?
• Do we have the systems and technology to support
blockchain technology? What controls do we have in
place? What are our backup business continuity plans if
blockchain goes down? How does blockchain fit into our
data protection strategy?
• Have we discussed how to audit blockchain technology to
ensure trust in the system?
• What are the regulatory, compliance, accounting and other
business issues blockchain could pose?
• Do we have people with the technical expertise and digital
skills needed for us to invest in blockchain?
• Are there realistic alternatives to blockchain that
should be considered?

Boards that develop a basic understanding of blockchain

and the other Essential Eight technologies can better
oversee management’s decisions related to which are
relevant to the company’s business and most likely to create
strategic opportunities.

Board byte: blockchain 11

 For more resources on what boards should know about the Essential Eight and digital
transformation, go to our website, Digital hub: insights for corporate board members.

Find additional resources on blockchain and emerging technologies on PwC’s Next in Tech hub.
And for information on cryptocurrencies, read Ten questions every board should ask
about cryptocurrencies.

Contacts Project team

For a deeper discussion about how this topic Elizabeth Strott
might impact your business, please contact: Senior Research Fellow
US Integrated Content Team
Vicki Huff Eckert
Global and US New Venture
Chrisie Wendin
and Innovation Leader
Editorial Director, Technology
(408) 817 4136
US Integrated Content Team
victoria.huff@pwc.com
Alan Morrison
Paula Loop
Senior Research Fellow
Leader, Governance Insights Center
US Integrated Content Team
(646) 471 1881
paula.loop@pwc.com
Karen Bissell
Marketing Manager
Barbara Berlin
Governance Insights Center
Director, Governance Insights Center
(973) 236 5349
Felipe Oppen
barbara.berlin@pwc.com
Design
Creative Team

Ryan Lasko
Design
Creative Team

1. UBS, “Beneath the bubble,” October 13, 2017.

pwc.com
This content is for general information purposes only, and should not be a substitute for consultation with professional advisors.

© 2018 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
313283-2017 FO.